What is a Holding Period
Introduction
- The stock market is a dynamic place where investors trade in various securities.
- The primary objective of stock market investment is wealth creation, with the added benefit of portfolio diversification.
- To streamline your investment journey, it is necessary to be acquainted with the stock market's terminology.
- This article sheds light on an important term known as the 'holding period.'
What is a Holding Period?
- The term 'holding period' refers to the time duration for which an investor holds a particular stock. It is the duration between the purchase and sale of an asset.
- If an investor invests Rs. 1,50,000 with an interest rate of 10% for five years, the holding period will be five years.
- The holding period can be short-term or long-term. If the share is held for less than a year, it is considered a short-term holding; otherwise, a long-term holding.
Start Investing with Free Expert Advice!
How is the Holding Period Calculated?
- The formula for calculating the holding period is given below:
Return = Income = (EOPV - IV) / IV
EOPV stands for End of Period Value.
IV stands for Initial Value.
- The holding period return is a metric that evaluates the worth of a stock and makes comparisons with other available shares.
- It quantifies the return obtained from holding a stock over a specific period, which can be either positive or negative, depending on the selling price upon disposal.
What is The Importance of a Holding Period?
Listed below are two major reasons that contribute to the importance of the holding period.
-
Taxation
The tax levied on the stock is determined based on the holding period. If an asset is sold before a specific threshold, it becomes subject to short-term capital gains tax. Conversely, assets held for a considerable period of time are subject to long-term capital gains tax.
-
Returns
The holding period is a crucial factor in calculating investment returns, particularly for equity investments. Such investments offer multiple sources of income, including capital appreciation and dividends.
Conclusion
- As an investor, it is crucial to understand the concept of a holding period to maximize returns and make intelligent decisions.
- It not only determines the tax implications but also helps in assessing the performance of the investment. Investors gain a comprehensive picture of their investment's profitability by considering the duration of holding an asset.
Related Blogs: B Shares Mutual Fund Explained | How To Choose High-Return Mutual Funds For Your Portfolio | What are Growth Mutual Funds | Exploring Contra Funds & Contrarian Investing Strategy
